The dream home bargain

Are you a person who always looks for the steal deal? Someone who judiciously budgets your expenses to get the best bet out of everything life can offer you?

Well, then you probably must be putting in a lot of research on where you shop, when you shop and how you shop for it. Right from the precious antique furniture piece to the lovely second-hand-but-still-in-mint-condition Fiat you own, everything has been bought with a great deal of thought, calculations, research and background check.

Now you have decided to opt for your own house. As usual your mind is ticking about how to make this one the steal deal of a lifetime.

Well, we got news for you. Have you ever considered a home auction that is periodically conducted by several banks? You actually can get a house which is lesser by nearly 20 per cent of the current market value. Let us help you get started on some research for you to build the plan for your steal.

How does it work

The SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (54) of 2002), empowers the banks and financial institutions with the right to recover the mortgaged property in case of loan defaults, without the intervention of the court. This means the lenders can take immediate action and bring into effect the takeover of the property in question quickly.

Though it seems to be at the expense of the home loan defaulter, who is not examined keenly for reasons behind the defaults, it appears to be a good opportunity for people to buy a property for a very reasonable amount of money.

Why it could be a steal

Once the lender takes control of the property, an independent valuation is conducted with the help of an independent chartered surveyor who fixes two values for the property.

One is the market value of what the property is actually worth and another is termed as the distress value, which is around 15-20 per cent lower than the market value.

Due to the circumstances under which the auction is conducted, the property is almost always quoted with the distress value for the minimum bidding price at the auction. At the auction, of course, the prices can go up according to the bids and the location of the property.

This gives the prospective new buyer an opportunity to win an auction for a very good deal as opposed to buying a property at the existing market value.

The market for auctioned properties

It is still a very unorganised market that is just beginning to open up as a venue for a prospective home buyer. More often than not, it is more possibly a property investor's market rather than an end-user's market. Also, the proportion of commercial properties auctioned could be much higher compared to residential properties auctioned.

Listed below are some pointers to guide you on the process and background check:

A. Scrutinize property sections of newspapers

Many nationalised banks periodically advertise in popular dailies about auction dates, venue and the location of properties, etc to be put up for sale.

B. E-auction is also an option

Some banks do announce it by the way of e-auctions, as it is a faster, more transparent medium to choose the highest bidder. It reaches out to a wider target audience and it helps the banks sell these properties at an effective price, which will help them recover the costs incurred through the loan more efficiently.

C. Secure legal aspects

As a prospective bidder you will be allowed to check the property you are planning to bid beforehand, once a caution fee has been collected from you for participating in the auction.

Do make arrangements for a legal counsel to accompany you for this visit and help you with all the legal aspects of the transaction. Though you are making a business transaction with the banks, which by itself means you will receive a legally safe and registered property, you still need to do your share of the homework.

With the help of your legal counsel, investigate the title of the documents and do your research with the registry for a track record of the past 30 years of the property to understand who were its past owners, how many hands it changed and whether there was any legal tangle in the past that needs to sorted out before your make your winning bid.

Verify all municipal records, tax records, whether the current owner has sole ownership and if it can be transferred to you in accordance with the rules specified in the Transfer of Property Act.

D. Be prepared for additional costs

The properties auctioned are disposed of in the state they were in when first taken over by the banks. Hence, there might be some costs like outstanding payments due in terms of house tax, electricity, repairs, renovation, et cetera that need to be incurred once you purchase the property. Factor in all these expenses when you make the bid.

The emotional side of it

When one looks at it from the perspective of an auction for the homes of defaulters, one does feel a wave of emotion about the unconventional route to buy a home. One may wonder about the loss of one becoming the gain of another.

However, you need to treat it as nothing more than a sale transaction because you cannot allow yourself to be affected by somebody else's mismanagement of finances. Moreover, not all houses are given up for auction by home owners unable to pay the loan, it could be a situation where the individual giving up the house to the bank considers it as a fixed asset that could be liquidated in an hour of need.

The excess funds from selling the house, if any, would go to the previous house owner, who gave it up to the bank. Moreover, all sale transactions happen through the bank, so you need not worry about the technical aspects of the sale. However, you need to get your routine checks in place to see that you derive the benefits that ideally accompany such a steal deal.

The author is Head of Content & Research at BankBazaar.com

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